Yesterday’s rate-comparison announcement from the National Credit Union Administration illustrates a point I’ve heard repeatedly in reporting an upcoming story about credit unions: if CUs are having a hard time raising enough capital to keep pace with share growth, they should curb that growth by paying less in dividends/interest. In the seven CD categories tracked by the NCUA survey, credit unions paid, on average, 31 bps more than banks for deposits.
The pace of share growth at some credit unions is certainly causing capital concerns, as indicated in this December letter from NCUA chairman Debbie Matz to Congressman Barney Frank, chair of the House Financial Services Committee. In the letter Matz points out that some credit unions are reluctant to take in more deposits, which, without a corresponding rise in capital, diminish net worth and make the credit union susceptible to prompt corrective action.
“The risk of reputational damage from being branded less than ‘well capitalized’ and in need of ‘restoring’ net worth…is reportedly having a significant chilling effect on the willingness of some ‘well capitalized’ credit unions to accept new share deposits,” Matz said.
H/t to CSBS Newbytes.
Charlie Funk, chairman-elect of the Iowa Bankers Association, gave an update on credit unions at last week’s IBA convention and noted that “two corporate credit unions have failed this year at a large cost. There was a large assessment that was made last year, and the credit unions will continue to have to pay large assessments to pay for those failures.”
The National Credit Union Administration placed Kansas-based U.S. Central and California-based WesCorp in conservatorship last March. NCUA noted that “Corporate credit unions do not serve consumers. They are chartered to provide products and services to the credit union system.” U.S. Central had about $34 billion in assets and served 26 credit unions when it was seized; WesCorp had $23 billion in assets and served 1,110 credit unions.
Tom Farin, president of the eponymous asset liability consultancy based in Fitchburg, Wis., commented on the corporate credit union situation earlier this year, in an interview on bank funding. He said much of the difficulty stemmed from investment in Alt-A securities and was rippling through the industry.
“There’s a bunch of corporate credit union [customers] that are in financial difficulty, because if you had stock in U.S. Central you had to write it off, which means all of these regional corporates took a pretty big hit,” Farin said.
Leslie Anderson, president and CEO of a $53-million ag bank in Nebraska, told the House Financial Services Committee that CRA should cover all depository institutions, specifically credit unions. Anderson also proposed:
“eliminating the ‘intermediate small’ bank category from the evaluation process and suggested that calls for a more narrow definition of community development risk complicating the evaluation process and deterring banks from maximiziing CRA opportunities.”
Anderson testified for the American Bankers Association, which posted her testimony.
The National Community Reinvestment Coalition is calling for large credit unions to comply with the Community Reinvestment Act. The organization just published a report showing that large credit unions are not serving minorities and low-income people to the extent that banks are. NCRC cites CRA as a factor and says credit unions, particularly the 146 with more than $1 billion in assets, should no longer be exempt from the 1977 law.
Consider this from the report’s executive summary:
The state of Massachusetts presents an ideal controlled experiment for examining CRA’s effect on lending, as it is one of only two states to apply CRA to state-chartered credit unions. NCRC’s report finds that the CRA-covered state-chartered credit unions perform better on fair lending indicators than the CRA-exempt credit unions with a federal charter that operates in Massachusetts.
In 2006, the Government Accountability Office reported credit unions serve a lower percentage of low-income and moderate-income people than banks. While this surprised some people, it has never surprised me. Many credit unions were formed around employers, so most credit union members have jobs — generally good jobs, the kind offered by companies large enough to sponsor a credit union.
The timing of the NCRC report is good. In recent years, regulators have approved more community charters for credit unions. This gives them a geographic field of membership. It would have been appropriate for regulators to include in the charters requirements for serving all income groups within those communities. But no such requirements have been made. My guess is that the disparity between the proportion of low-income people served by banks compared to credit unions has widened since that 2006 GAO study.
Although NCRC works with bankers through its Banker/Community Collaborative Council to make the most of its community partnerships, in no way can the NCRC be considered a lackey of the banking industry. Consider this NCRC press release supporting the formation of a Consumer Financial Protection Agency. These guys are independent, with their own goals; they have, nonetheless, spotted an injustice which could easily be corrected by expanding the jurisdiction of CRA to credit unions.
